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The COMMERCIAL ECONOMIC ISSUES & TRENDS FORUM explored rationale behind largely positive commercial market projections. While commercial market fundamentals appear strong, NAR Chief Economist Lawrence Yun did caution that one key performance indicator was likely to decline in the coming year: transaction count. Market conditions, such as nervousness about rising interest rates on the buy side plus rising cap rates on the sell side, would lead to more standoffs in negotiations. “The bid and the ask price will be divergent and the transaction will just stall,” Yun said. “I think in 2018 [...] we anticipate lower transactions [...] because of the unique market circumstances.”
Yun went on to laud the efforts of NAR lobbyists for their work in preserving the 1031 exchange tax shelter, an IRS regulation that in fact has gone away for non-real-estate transactions but remains in place for the commercial real estate industry. While recent tax reform efforts on Capitol Hill are centered on tax cuts, Yun cautioned that the reform process is a long one and we are only in the first phase.
Also speaking was JLL's Chief Economist Ryan Severino, who lauded the Class A office property as the main driver of absorption. “Class A properties are the overwhelming majority of what's being absorbed in the U.S. these days.”
Severino went on to characterize the “Goldilocks economy”, where the fundamentals are performing correctly but growth hasn't been high enough to warrant a regression. He focused on the office sector, naming technology companies as the central driver of demand there.
On the question of policy risks amid a weekend that saw Capitol Hill promote a tax plan with many surprising and potentially damaging proposals, Severino was clear: “I think there's pretty good evidence that tax cuts don't pay for themselves.”
Key Predictions from Yun & Severino
1. Overall deal volume likely to decline (Yun).
2. GDP +2.7%, +2.4 mil job growth, CPI inflation 2.5% (Yun)
3. Technology companies drive office growth (Severino)
“If you didn't attend, you missed some big discussions on tax reform, 1031s, economic outlook, and much more. The Commercial Marketplace at the Expo had more vendors and presentations than before. It was a powerful event for commercial real estate.” –Kay Michael Alexander, ABR, GREEN, GRI
